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Plugged In

Investors Say "Nah" to Nanosys

By

Eric J. Savitz

Updated Aug. 9, 2004 12:01 a.m. ET

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INVESTORS LAST WEEK STUCK a pin in the nanotechnology stock bubble -- even before it had a chance to fully inflate.

In what was supposed to be a seminal event for the nascent nanotech sector, a development-stage Palo Alto, Calif., company called Nanosys had planned to go public last week in a deal co-managed by
Merrill Lynch,Lehman Brothers,
CIBC World Markets and Needham & Co. Nanosys had planned to sell 6.25 million shares for $15 to $17 each. If the deal had gone through, the company would have had 21.9 million shares outstanding -- and a stock-market valuation of about $350 million, assuming the sale came at the middle of the range. For the several hundred private companies trying to create products with nanotechnology -- the manipulation of very small bits of matter, generally 100 nanometers or smaller -- a successful initial public offering would have opened the public market for a potentially world-changing new industry.

Alas, Nanosys pulled the IPO, citing adverse market conditions. No surprise there: Companies that pull their IPOs always cite adverse market conditions. Certainly, there's no more adverse condition for a pending initial offering than lack of investor interest in a company. To be fair, the general market conditions last week certainly seemed adverse, with the Dow Jones Industrial Average slipping below the 10,000 level Thursday and technology shares taking a header.

But the truth is that Nanosys' inability to sell stock to the public had less to do with market conditions than it did with the company's limited stage of development. As I noted in a previous review of the Nanosys IPO ("Sweating the Small Stuff," July 5), this was nothing more than a public venture-capital deal.

Other than some one-time payments under collaboration agreements with government and corporate partners, Nanosys has no revenue. In fact, it has no products, and doesn't expect to have any for several years. For some reason, the company's bankers apparently concluded that they could sell Nanosys like an early-stage biotech company, theorizing that the lack of fundamentals would be overcome by potentially revolutionary science. In essence, attempting to take Nanosys public in a still-embryonic state was a cynical bet that the buzz over nanotech was loud enough to lure in speculative-minded investors.

Certainly, Nanosys doesn't lack ambition. It plans to develop products for the energy, defense, electronics, life-science and information-technology sectors. It has impressive partners, including
Intel,DuPont,
and
Matsushita,
among others. It has strong venture investors, including ARCH Venture Partners, Polaris Venture Partners and Venrock Associates. It has an impressive group of scientific advisers, and a founder, Lawrence Bock, with a long history of taking biotech companies public. And, not least, it has more than 200 patents and patent applications, some developed in-house, others licensed from universities and other research centers.

But as Nanosys had to learn the hard way, you can't get very far generating losses and patents, but no revenue. What would you use as the valuation metric, a price-to-patents ratio? Buying Nanosys would have required a leap of faith that the company could someday profitably convert its intellectual property into products someone will want to buy. And it may very well do that. But there is no telling when -- or if -- that will happen. With the stock market in a skeptical mood, there was no way to close the deal.

Cry no tears for Nanosys, however. The company still has about $40 million in the bank, which will keep it going for a while -- it has only 43 employees -- and it would have little trouble raising additional cash from the venture-capital market. Indeed, Nanosys might actually be better served by waiting a year or two until it can show the financial markets a few dollars in product-related revenue.

The interesting question is what the failed offering might mean for the rest of the nanotechnology sector's ability to tap the capital markets in coming months and years. Nanotech watchers are split.

To some, the deal's demise simply reflects the fragile state of the public markets. "It's confirmation that we're in a bear market, and that the IPO window for early-stage companies is closing," says Charles Harris, CEO of
Harris & Harris,
a Nasdaq-listed venture-capital firm focused on nanotechnology investments. "In the short run, it will be difficult for other nanotech-enabled companies to go public. In the long run, nanotechnology-enabled companies will be like biotech companies: the IPO window will open and close in concert with the cycles of the overall capital markets. As time goes by, nanotech will inevitably and inexorably be a source of new company generation. But public investor enthusiasm will wax and wane."

Right now, sentiment is clearly on the wane. The Merrill Lynch Nanotechnology index, composed mostly of companies with nano-size market caps, has slumped 35% since its April 1 debut. Shares of Harris & Harris, which owns a 1.58% stake in Nanosys, as of midday Friday had swooned 1.93, or 19%, to 8.17. That stock, which trades under the symbol TINY, has lost about two-thirds of its value since peaking at close to 23 in early April. Harris notes that his firm has about $75 million in assets, more than $50 million of it in cash; despite the stock's swoon, it still carries a market cap nearly twice its net asset value.

The bottom line: It could be a while before another nanotechnology outfit tries to go public. Juan Sanchez, an analyst with Punk Ziegel, a New York investment firm, contends there's little chance of seeing any nanotech IPOs this year -- and certainly none as speculative as Nanosys. "Value is being created," he says. "The fundamentals are there. The industry is progressing. But the market isn't ready." When it comes to IPOs for companies without revenue or products, the market may never be ready.

BEA's Brain Drain

The maker of business software that integrates computer systems with the Internet had another defection. Chief Technology Officer Scott Dietzen, who announced his resignation last week, was the latest top executive to fly the coop. The San Jose company's chief architect, Adam Bosworth, resigned last month to join Google (Plugged In, July 26).

There were earlier rumblings from outside the company that Dietzen was on his way out, but BEA officials wouldn't confirm his imminent departure at the time of Bosworth's exit. Rick Jackson, a senior vice-president of product marketing, is also bolting BEA to join Borland Software. And a number of top software engineers are leaving BEA as well, causing something of a brain drain for the software firm. Its shares have swooned from their 52-week high of 15.50 in September to the 6.09 reached Friday.

In an attempt to put their best foot forward, BEA calls the rash of departures a natural result of a strategic reorganization that will de-emphasize new development of products in exchange for a sharper focus on selling and marketing the products already in place. Dietzen was known for his key role in leading WebLogic, which was the inventor of BEA's core application-server product gained through acquisition.

So -- the spin goes -- with less emphasis being placed on the geek camp within the company, there's less inspiration for guys like Dietzen and Bosworth, a former Microsoft developer, to hang around.

As part of the shuffle, insider Tom Ashburn has been promoted to executive vice-president to oversee all sales, service and marketing operations.

Ashburn will have his work cut out for him. BEA Chief Executive Alfred Chuang warned Wall Street last week that the company isn't expected to meet revenue forecasts for the quarter ended July 31. That was the bad news. The good news, says Smith Barney software analyst Tom Berquist, is that it could have been a lot worse.

"While the company did miss license revenue," he says, "they came in better than the nightmare scenarios that had been speculated on in the recent weeks after the big problems...for the broader enterprise group."

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